Should services in India need differential GST rates?

At present, the effective rate of service tax is 15% including cesses and this rate is uniformly applied on all services, except a few which are taxed on a lower value through an abatement mechanism.TNN | Updated: January 30, 2017, 17:51 IST

Recent developments appear to indicate that India will finally roll out the GST from July 1, 2017. Several key decisions including the rate buckets, administrative powers, etc, have now been settled, and it does appear that the long-awaited reform is finally approaching the take-off stage.

However, it does seem that as part of the decision-making process, enough attention has not been given to services in general and difficulties of service providers in particular. It is apparent that India is a predominantly service sector-driven economy and the scorching growth in service tax revenues over the past few years is testimony to the same. At present, the effective rate of service tax is 15% including cesses and this rate is uniformly applied on all services, except a few which are taxed on a lower value through an abatement mechanism.

While the GST Council has decided that there would be four rates — 5%, 12%, 18% and 28% — at which goods would be taxed, no decision has been communicated in respect of services. The rationale for differential rates for good, is driven by the desire to keep the rate lower for goods consumed by the masses and higher for those consumed by affluent sections of society. This thought process seems to be singularly absent in all the prevailing discussions on taxation of services. While there is an abatement on certain services, the rationale and percentages of such abatement do not appear to relate to the consuming strata of such services.

There are certain services which are consumed by common people such as telecom, cable/DTH, rail travel agents' services, etc, which should ideally be taxed at 5%. At the other end of the spectrum, there are services such as beauty parlour, sponsorship, interior decoration and fashion designing, dry cleaning, etc, which could potentially be taxed at the higher rate of 28% as these are consumed by affluent sections of society. The rate of 12% could also be selectively applied to certain services such as banking, insurance, economy class air travel, etc, and other services could be taxed at 18%.

In addition to the criteria of determining the service tax rate on the basis of the purchasing power of the relevant section of society, an attempt can also be made to have a lower standard rate of 12% for all B2C services (as no credit would be eligible), and a higher standard rate of 18% for all B2B services (as these would be credit-eligible in the hands of the recipient).

The present situation of applying the same rate of service tax on all services leads to anomalous situations of taxing luxury goods at a higher rate but taxing related services at a standard rate. For instance, if the GST rate on luxury cars is higher, then surely the services of car maintenance provided by the authorised service centre for those luxury cars should also be taxed at a rate higher than that applied to common cars and two-wheelers. There is also a good case for providing lower service tax rates on certain services to synchronise with various government initiatives such as Digital India (credit card/debit card/mobile wallet services), Healthy India (health and fitness club services), Skill India (commercial training and coaching services), etc.

It is therefore clear that having one rate for taxing services under GST in a diverse country like India would make the principles for taxing goods and services divergent, leading to a larger incidence on the less affluent sections of society, which is not in consonance with the fundamental principles based on which GST is being introduced.

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